As interest rate cuts signal weak economy watch the Canadian dollar

Article content

While the Bank of Canada’s interest rate cut last week may be seen by some as good news, it points to worrisome underlying problems.

The central bank cut rates by 50 basis points, sending its overnight rate down to 3.75 per cent. Interestingly, bond markets factored this in with no movement in the five-year Government of Canada bond yield following the announcement.

Article content

While politicians are cheerleading rate cuts as a sign of inflation coming under control, the fact of the matter is it’s a weakening economy that’s responsible, as Genevieve Roch-Decter of Grit Capital recently posted on X (formerly Twitter). She noted that Canada was the first G7 nation to cut rates as its economy is falling behind, with a number of subsequent cuts since.

Article content

https://x.com/GRDecter/status/1849085230130332019

According to a report by University of Calgary economist Trevor Tombe, by June this year, real GDP per capita had declined for five straight quarters. Over the previous year, per capita GDP fell by 2.2 per cent, and compared with 2022, it is down 3.6 per cent.

“This has real implications for the economic wellbeing and standard of living of Canadians. Had Canada simply matched U.S. growth, for example, our economy would be 8.5 per cent larger today. That is roughly equivalent to $6,200 more annual income per Canadian. This growing gap is now the widest it has been in nearly a century, which should prompt serious concern,” he writes in a study for the Fraser Institute, Boosting Canada’s Competitiveness by Reforming Business Taxation.

Article content

Article content

This brings to mind a great mantra: “You can make excuses or progress, but you can’t make both.” Unfortunately, all we’re getting out of Ottawa is plenty of excuses with a Prime Minister unwilling to acknowledge the depth of the situation. This is an issue because the first step to fixing a problem is to acknowledge there is a problem.

Despite the Liberal Party Caucus meeting last Wednesday, marked by some members’ dissatisfaction with their leader, it looks like we’re going to get more of the same unless there is a vote of non-confidence prior to the pre-set October 2025 election.

Frankly, I’m quite tired of writing about this and I’m sure many Canadians are just as frustrated as I am. However, I do worry about desperate people doing desperate things, as a lot more damage can be done before next year’s election.

This means a weaker Canadian dollar and an economy being pushed into a recession, paired with a worsening affordability crisis with such moves as the carbon tax continuing to take its toll on everyday Canadians. This says nothing of the incredible strain on housing, policing, education and healthcare worsened by record setting immigration policy.

Article content

The debasement of our currency should be of serious concern. This late summer’s short covering favouring the Canadian dollar over the U.S. dollar has now been given back as it now tests year-to-date lows. Fortunately, we took advantage of this short-term rally to buy more U.S. dollars for our clients as a hedge, but many Canadian investors are left exposed due to a home bias with their portfolios.

A Vanguard report back in June found that Canadians allocate 50 per cent of their equity exposure to domestic holdings. This is 18 times more than the percentage of Canadian assets in the global equity market (which is roughly 2.7 per cent). Canada also imports US$280 billion worth of goods from the United States, a 33 per cent increase from 2016 lows. A weaker Canadian dollar will only add to the ongoing affordability challenges many Canadians are facing.

Looking ahead, unless there are some serious changes made, we are not optimistic about our currency, especially given the widening disparity between our two economies. We need less cheerleading of rate cuts and an actual willingness to address that there is a problem here. Unfortunately, we may have to wait until this time next year for this to happen.

Article content

Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.

_____________________________________________________________

If you like this story, sign up for the FP Investor Newsletter.

_____________________________________________________________

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Article content